HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

[2007] UKHL 33

1. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Rodger of Earlsferry, and for the reasons he gives I too would dismiss the appeal.

LORD SCOTT OF FOSCOTE

My Lords,

2. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Rodger of Earlsferry, and for the reasons he gives I too would dismiss this appeal.

LORD RODGER OF EARLSFERRY

My Lords,

3. The first pursuer, Mr John Stewart Hamilton, and his business associate, Mr Kalo, were at one time shareholders in the Highland Spring company which successfully developed the well known brand of mineral water, based on a spring in the area of the village of Blackford in Perthshire. For a number of years Mr Hamilton held a senior position in the company, but eventually left as a result of a dispute.

4. The Gleneagles Maltings Company also owned premises and water rights in the village of Blackford, but it lacked the capital to develop them. Mr Hamilton was introduced to Gleneagles Maltings and, from his knowledge of the area, he advised that the water sources in question were unsatisfactory for commercial development. He considered, however, that two big springs on the Gleneagles Estate were suitable for such development if the necessary rights could be acquired.

5. Mr Hamilton and Mr Kalo were shareholders in Stebbings Inc, the second pursuers, a company incorporated in Panama. To take the potential development of the big springs forward, Gleneagles Maltings agreed to sell its premises and spring to the Gleneagles Spring Waters Company Limited ("Gleneagles") in return for a 3% shareholding in Gleneagles, the remaining 97% being held by Stebbings Inc. (The 3% holding was eventually bought out and does not feature further in the story.) By about 1990, Gleneagles had concluded potentially valuable agreements for the supply of water from the springs on the Gleneagles Estate and had begun producing a small quantity of water to be sold under the Gleneagles brand name. But the company was not in a position to take the development of the business forward by itself.

6. One possibility was that Gleneagles would sell out completely to another company, such as Evian. Another was that it would enter into a distribution deal with another company that would provide the necessary distribution network for Gleneagles water. The third possibility was that Gleneagles would join with another company that would invest in Gleneagles, but would also provide a suitable distribution network.

7. Mr Hamilton considered that Gleneagles water should be marketed as a high quality brand. He therefore favoured following the example of Perrier who had first successfully established their brand in hotels, restaurants and public houses - the "HORECA" Hotels, Restaurants and Catering sector, or "on-trade". They had then used this success to build up their "off-trade" sales in supermarkets and other grocery and off-licence outlets. The general idea was that, if you had enjoyed drinking the product in a congenial atmosphere on an evening out, this experience would persuade you to select the product when you later saw it on the shelves of your supermarket. Mr Hamilton favoured a similar strategy for Gleneagles water.

8. On Mr Hamilton's view, therefore, it was critical to have the necessary arrangements in place from the outset for distributing the water to the on-trade. So, when contemplating the various possible business strategies under which the pursuers would retain an interest, the arrangements for distribution were important for him. In particular, this was so when - after a potential buy-out had fallen through - he decided, in December 1991, to try to find a company to take a stake in Gleneagles.

9. Mr Derek Douglas of Fraser & Partners (Business Managers), who had already been involved in the affairs of Gleneagles, put together a Business Plan. At Mr Hamilton's suggestion Mr Douglas contacted the defenders, who were then known as Allied-Lyons. Allied-Lyons were interested and one of their directors, Mr David Beatty, was asked to carry on discussions on their behalf. Initially, he was corporate development director of their subsidiary, The Hiram Walker Group Ltd, which ran their wines and spirits division, but in March 1992 he became deputy chairman of J. Lyons and Company Limited ("Lyons"), a wholly owned subsidiary of the defenders, which ran their food manufacturing sector. The defenders admit on record that Mr Beatty was given authority to bind them and to make representations on their behalf in his discussions with Mr Hamilton, who acted both in a personal capacity and for the second pursuers.

10. In fact, to begin with, Mr Hamilton's discussions were with Mr Stan Walters whom Mr Beatty had asked to evaluate the commercial and financial prospects of Gleneagles. Mr Beatty may have been present, however, for part of a meeting towards the end of March 1992. From then onwards the discussions were between Mr Hamilton and Mr Beatty.

11. In their pleadings, the case for the pursuers was that in the course of their discussions "Mr Beatty repeatedly represented that the defenders' distribution arrangements and facilities would be made available in the knowledge that the pursuers were placing reliance on the said representation...." This formulation of the alleged misrepresentation makes no specific reference to distribution in the on-trade. Nevertheless, Mr Hamilton's evidence at proof - which the Lord Ordinary (Abernethy) accepted - was, in essence, that he had explained to Mr Beatty the need for distribution to both the on-trade and the off-trade from the outset, the strategy being that success in the on-trade would breed success in the off-trade. As he saw it, the defenders were to assist Gleneagles to have their product distributed to the on-trade, especially through Britvic - by which he meant Britvic Soft Drinks Limited.

12. The case for the pursuers as advanced in submissions on their behalf after proof was that Mr Beatty had represented that the defenders would indeed follow that strategy. By contrast, although Mr Beatty had difficulty in remembering the discussions, as will be seen in more detail later, his clear position was that the initial move on distribution was always intended to be into the off-trade. The Lord Ordinary resolved this issue in the pursuers' favour in a short passage at the end of para 45 of his judgment:

"Having considered the evidence on this critical point I am satisfied that Mr Beatty did not communicate to Mr Hamilton that this was his strategy. On the contrary, I am satisfied that Mr Beatty led Mr Hamilton and Mr Douglas to believe that he agreed with Mr Hamilton that Gleneagles should try to penetrate the on-trade from the beginning as well as the off-trade and that the defenders' distribution arrangements and facilities for both the on- and off-trades would be made available to Gleneagles. Had it been otherwise I am satisfied that Mr Hamilton would not have entered into the Agreement of 24 November 1992."

As the Lord Ordinary says, a subscription agreement was concluded on 24 November 1992 under which Lyons became the majority shareholders in Gleneagles, the pursuers together retaining a minority shareholding.

13. Thereafter, preparations got under way for the development of Gleneagles water. After some trials, the product was eventually launched on the market in March 1994. Mr Beatty had retired early in 1993 and so had nothing to do with the business after that. Leaving all kinds of other matters on one side, the defenders accept that, when Mr David Potter was seconded to Gleneagles in about August 1993, his brief was to promote the product initially in the off-trade. Development in the on-trade would follow later. Again, the Lord Ordinary stated his conclusion shortly, at para 58

"In any event, whatever the reason all I can say is that on the evidence the defenders did not assist Gleneagles in getting access to Britvic or to the on-trade in general."

14. Unfortunately, the business of Gleneagles did not prosper and in February 1998 Gleneagles was put into administration. By that time the pursuers' shareholding was virtually worthless.

15. In their pleas-in-law in the present proceedings the pursuers claim damages by way of reparation for the loss and damage which they say they suffered as a result of the fault and negligence of Mr Beatty, for which the defenders are liable, in inducing them to enter into the subscription agreement. Although these pleas-in-law are not very informative, the pursuers' case before both the Lord Ordinary and the Inner House was based on alleged negligent misrepresentation by Mr Beatty in the course of his discussions with Mr Hamilton which led to the subscription agreement. As I have pointed out, the specifics of that alleged misrepresentation developed somewhat between the drafting of the pursuers' averments on record and the formulation of their case after proof. Essentially, they claimed that, relying on what Mr Beatty had told Mr Hamilton, they entered into the subscription agreement on the basis that Lyons would assist them, from the outset, to have their product distributed to the on-trade through Britvic. This did not happen and the business failed, so making their shareholdings virtually worthless.

16. On 1 August 2003 the Lord Ordinary held in favour of the pursuers. Having considered the various factors involved in the failure of Gleneagles' business, he concluded, at para 78:

"On an overall view of the evidence it is impossible in my judgment to avoid the conclusion that if, following the agreement of 24 November 1992, the strategy which Mr Hamilton had been led to believe would be followed had been followed, it would have made a major difference to the company's fortunes. This would have been all the greater if, with the defenders' assistance, Gleneagles had succeeded in gaining access to Britvic but even without that, if the defenders had made available their distribution arrangements and facilities for supply to the on-trade in other ways, it would have been substantial. So while there is no doubt a multiplicity of causes, great and small, which led to the failure of the company, the failure to follow the strategy which Mr Hamilton had been led to believe would be followed was in my opinion at least a major, if not the major, contributing cause."

The Lord Ordinary awarded the first pursuer damages of £1 million and the second pursuer damages of £2 million.

17. The defenders reclaimed and on 1 November 2005 the Second Division (the Lord Justice Clerk (Gill), Lord Hamilton and Lord Marnoch) allowed the reclaiming motion and assoilzied the defenders: 2006 SC 221. The Lord Justice Clerk drew attention to a number of potential difficulties in the pursuers' case relating to causation. But the decision of the Division was that the Lord Ordinary had erred in holding that, on the evidence, the pursuers had proved the misrepresentation by Mr Beatty on which their entire case hinged. The pursuers have appealed to your Lordships' House.

18. Both in the appellants' written case and in his helpful submissions at the hearing, Mr Clark sought to argue that, not only was Mr Beatty under a duty to take reasonable care not to misrepresent the strategy that would be followed, but he was, alternatively, under a duty to take reasonable care to make clear to Mr Hamilton that the active use of facilities to penetrate the on-trade must await, and perhaps be contingent upon, the successful development of the brand in the off-trade. Mr Clark referred to this alternative formulation as a "duty to speak". It is convenient to address it first.

19. Mr Clark accepted, of course, that Mr Hamilton and Mr Beatty had been engaged in an arm's length commercial negotiation with a view to a possible subscription agreement. Such an agreement was not a contract uberrimae fidei and so no duty of disclosure would normally arise. But, even assuming that Mr Beatty knew or ought to have known that Mr Hamilton regarded access to the on-trade from the outset as essential, was he under a duty of care to make clear that the first stage would be for distribution to the off-trade, with distribution to the on-trade only following later?

20. Doubtless, if Mr Beatty knew that this was Mr Hamilton's position, a failure on the part of Mr Beatty to speak might be regarded as morally questionable. But that is different from saying that he was under a legal duty to speak.

21. In Peek v Gurney (1873) LR 6 HL 377 a prospectus for an intended company was issued by promoters who were aware of the disastrous liabilities of the business of Overend & Gurney which the company was to purchase. The prospectus made no mention of a deed of arrangement under which those liabilities were, in effect, to be transferred to the company. The appellant bought shares in the company and, when it was wound up, he was declared liable as a contributory and had to pay almost £100,000. He sought an indemnity against the directors, alleging misrepresentation and concealment of facts by the directors in the prospectus. His action failed because he had not in fact relied on the prospectus but had purchased the shares in the market. In the course of his speech, however, Lord Cairns expressed his agreement with the observations of Lord Chelmsford and Lord Colonsay that mere silence could not be a sufficient foundation for the proceedings. He continued, at p 403:

"Mere non-disclosure of material facts, however morally censurable, however that non-disclosure might be a ground in a proper proceeding at a proper time for setting aside an allotment or a purchase of share, would in my opinion form no ground for an action in the nature of an action for misrepresentation. There must, in my opinion, be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false."

22. Mr Clark accepted that something more than mere silence would usually be required to found a delictual claim for damages, but he argued that in certain circumstances a duty to speak would arise. In such cases a failure to speak would be negligent in law and a claim for damages could arise. For support, he pointed to the passage in the decision of the Court of Appeal in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665, 794H-795A where Slade LJ said:

"We can see no sufficient reason on principle or authority why a failure to speak should not be capable of giving rise to liability in negligence under Hedley Byrne principles, provided that the two essential conditions are satisfied."

Slade LJ had already identified the two essential conditions as being "that there has been on the facts a voluntary assumption of responsibility in the relevant sense and reliance on that assumption." He added, at p. 794E-F:

"These features may be much more difficult to infer in a case of mere silence than in a case of misrepresentation."

23. My Lords, the simple truth is that Mr Clark was unable to point to anything in the facts or evidence to show that, in this particular commercial negotiation, there had been any voluntary assumption of responsibility on the part of Mr Beatty. Nor have I been able to find any. In these circumstances the Banque Keyser decision does not provide a basis for holding that Mr Beatty was under a duty of care to tell Mr Hamilton about the defenders' distribution strategy if it differed from the one favoured by Mr Hamilton. Mr Clark did not suggest that such a duty could be founded on anything other than a voluntary assumption of responsibility. The alternative way of putting the pursuers' case must therefore be rejected. So, if they are to succeed, it can only be on the basis that there was a negligent misrepresentation by Mr Beatty.

24. The first thing to be decided is what, if anything, on the evidence, Mr Beatty actually said which could amount to a misrepresentation. It is convenient to identify the Lord Ordinary's conclusion on this matter by setting out again the passage from the end of para 45 of his opinion, together with further passages from paras 46 and 47. Having referred to Mr Beatty's evidence that the initial move was always going to be into the off-trade, the Lord Ordinary continued in para 45:

"Having considered the evidence on this critical point I am satisfied that Mr Beatty did not communicate to Mr Hamilton that this was his strategy. On the contrary, I am satisfied that Mr Beatty led Mr Hamilton and Mr Douglas to believe that he agreed with Mr Hamilton that Gleneagles should try to penetrate the on-trade from the beginning as well as the off-trade and that the defenders' distribution arrangements and facilities for both the on- and off-trades would be made available to Gleneagles. Had it been otherwise I am satisfied that Mr Hamilton would not have entered into the Agreement of 24 November 1992."

After explaining the position adopted by the solicitor advocate for the defenders in her closing submissions, the Lord Ordinary continued in para 46 and at the beginning of para 47:

"Mr Beatty's strategy certainly was that initially distribution would be to the grocery sector, the off-trade, and that would be done through the defenders' food manufacturing sector, which in practice was Lyons Tetley, and in the event there was assistance from Lyons Tetley in certain areas, although not distribution on the evidence. However, as I have found, that was not what Mr Beatty represented to Mr Hamilton was the defenders' strategy and, in any event, his own strategy envisaged attempting to penetrate the on-trade at a later stage. (How that was to happen was not explored.)

47. What I have found Mr Beatty did represent to Mr Hamilton is essentially the case that the pursuers make in the first sentence of article 4 of the condescendence."

The relevant averment in article 4 of condescendence is of a representation "that the defenders' distribution arrangements and facilities for supply to the on-trade would be made available to Gleneagles."

25. It must be said that, on a strict reading at least, there is a certain inconsistency in the Lord Ordinary's exposition of his findings. On the one hand, in para 45, he finds that Mr Beatty led Mr Hamilton to believe that he agreed that Gleneagles should try to penetrate the on-trade as well as the off-trade "from the beginning". On the other hand, in para 47 he finds that Mr Beatty represented that the defenders' distribution arrangements and facilities for supply to the on-trade would be made available to Gleneagles - with, crucially, nothing being said about this happening "from the beginning". Presumably, however, the Lord Ordinary is just reflecting the way that the pursuers' case developed in the course of the proof, and he should be regarded as holding that Mr Beatty represented that Lyons would follow a strategy in which Gleneagles would be assisted to penetrate the on-trade as well as the off trade "from the beginning". Certainly, in his submissions before the House, Mr Clark accepted that, in order to succeed, the pursuers had to show that Mr Beatty had represented to Mr Hamilton that this strategy would be followed from the beginning.

26. Before turning to look at the evidence, it is useful to stand back and notice what the pursuers' case really amounts to. As Mr Hamilton acknowledged in cross-examination, in the documentation making up the subscription agreement, which was revised by solicitors for both sides, there is quite simply nothing said about the distribution strategy that is to be followed. On any view, this is a striking omission if, from Mr Hamilton's point of view, that strategy was a key element in his decision to enter the agreement. Therefore, in substance, the pursuers are arguing that, though nothing was said about the matter in the subscription agreement, Lyons were actually under an obligation to follow that distribution strategy. Prima facie, one might have expected commercial men to frame their agreement in a more businesslike manner so as to cover the point, if this was what they intended.

27. The position is all the more striking when two further aspects of the context of the alleged representation by Mr Beatty are considered.

28. First, Mr Beatty was just a few months away from retirement and must have known that he would not be the person in charge of distribution by the time that the business was up and running. So he was by no means well placed to make authoritative pronouncements about the distribution strategy that would be followed.

29. Secondly, and more significantly, Mr Hamilton's position in evidence was that access to the on-trade was to be through the distribution network of Britvic - Britvic Soft Drinks Ltd. That company was owned by Britvic Holdings Ltd, 90% of the shares in which were held by Britannia Soft Drinks Limited ("Britannia"), the other 10% being held by Pepsi. Bass plc had a majority shareholding in Britannia, with a subsidiary of the defenders, Allied Breweries Ltd, and Whitbread plc holding approximately 25% each. In his evidence in chief Mr Hamilton said that, at the time of their negotiations, Mr Beatty had been a director of Britannia. But it emerged in cross-examination - and was confirmed when Mr Beatty gave evidence - that, in fact, he had never been a director of that company. However the misunderstanding may have arisen, it seems at least possible that Mr Hamilton's belief that Mr Beatty was on the board of Britannia may have coloured his understanding of what Mr Beatty said about access to the on-trade through Britvic, as opposed to access through companies in the defenders' group. The evidence of both Mr Hamilton and Mr Douglas showed that, certainly so far as the companies in the defenders' group were concerned, on the day the subscription agreement was being finalised, Mr Beatty was at pains to make sure that Mr Hamilton understood how little Lyons could do to provide Gleneagles with distribution through them.

30. In fact, however, access to Britvic's distribution network was never going to be easy. As the shareholding shows, the dominant force in Britannia was Bass and Mr Walter gave evidence that they were very protective of their own products. The potentially difficult climate is shown by the fact that the conclusion of an agreement between the pursuers and defenders was delayed from June until November 1992 because of a problem which had arisen between the defenders and Britannia. The evidence about that problem was a little vague. It seems, however, that, by reason of the arrangement under which Allied Breweries held their shares in Britannia, the defenders were precluded from themselves engaging in the bottled water market. A solution was eventually found about the end of October 1992. On 3 November the defenders' main board gave approval for the deal with the pursuers to go ahead. In the ensuing subscription agreement the solution was reflected in clause 7.6 which allowed Lyons to transfer all their shares to Britannia at any time before the end of 1993.

31. Against that background I turn to consider the evidence about the alleged representation by Mr Beatty. The Second Division reversed the Lord Ordinary's finding that Mr Beatty had represented that Lyons would follow a strategy in which Gleneagles would be assisted to penetrate the on-trade as well as the off-trade from the beginning. Essentially, the Division did so on the ground that, properly analysed, the evidence as set out in the transcript did not support the finding. Before the House it was not disputed that the Division had been entitled to interfere with the Lord Ordinary's finding, if indeed the evidence did not justify it.

32. In his examination in chief Mr Hamilton gave evidence that Mr Beatty had made his representation about the strategy to be followed at a meeting in the offices of Maclay Murray & Spens on 4 May 1992. The pursuers' pleadings contained an averment to similar effect. But, in her cross-examination of Mr Hamilton, Mrs Swanson, the solicitor advocate for the defenders, pointed out that Mr Beatty had not been present at that meeting. In re-examination, having referred to his diary, Mr Hamilton concluded that the occasion in question might actually have been a visit by Mr Beatty to Blackford on 27 May. In his opinion, the Lord Ordinary in effect held that Mr Hamilton's evidence of what Mr Beatty had said was reliable, even though he had been mistaken about the occasion on which Mr Beatty said it.